What is Working Capital

Part of the balance sheet, a working capital forecast is essential for any business plan. A working capital forecast in deficit can lead to insolvency.

Working Capital and Solvency

Recognised in the balance sheet, net current assets (current assets less current liabilities)  describes the working capital of a business.

Recognised in the balance sheet, working capital describes the liquidity of a business. If working capital is is deficit, a business is technically insolvent. Because of that, when forecasting and planning your business, the balance sheet forecast is just as important as profit and loss.

Click here to view a working example of a balance sheet.

Current Assets

Apart from cash and marketable securities, principal current assets are accounts receivable and stock / inventory. Others include prepayments such as insurance premiums, deposits and prepaid letters of credit. 

Current Liabilities

Current liabilities on the other hand are all debts falling due for payment within twelve months, regardless of whether or not they have been incurred in the pursuit of core trading.

All debt payable within twelve months is therefore chargeable to working capital. These will include payments due to suppliers of goods, services and overheads, VAT, corporation tax, bank overdrafts (which are always assumed to be repayable on demand), asset finance repayments and other loans.

Click here to view a working example of an analysis of forecast assets and liabilities

Financing Short Term Working Capital Deficits

The problem with using borrowings to cover cash flow shortfalls is that they cannot be allowed to become a long term habit. They are only a temporary expedient, not a cure.

However one problem that is especially associated with seasonal businesses is that there might be a month or more during the quiet time of the trading year when working capital may not be able to deliver sufficient cash flow.

That is why, when forecasting using Figurewizard it is always important to check for monthy deficits which can be found in the monthly cash flow, bank and finance budget.

If that indicates some months to be in deficit it will important to revise the business plan, including the level of short term borowings such as the bank overdraft or other loans in order to eliminate them. The What-If Calculator and Planner is ideal for this, having been designed specifically for that purpose.

Click here to view a working example of a monthly cash, bank and undrawn finance forecast.

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